February 04, 2009

Obama's Executive-Pay Caps Don't Address the Root Problem

"The Obama administration is expected to impose a cap of $500,000 for
top executives at companies that receive large amounts of bailout
money, according to people familiar with the plan.

" Executives would also be prohibited from receiving any bonuses above their base pay, except for normal stock dividends."

I suppose it's a start, but it doesn't address the massive root-problem that's been growing for years: public company executives have been legally allowed to loot companies and essentially rob shareholders .

The effects have been cumulative and have contributed to unemployment levels, as well as draining wealth from many Americans who will depend on their stocks to retire.

[No, average salaries have not gone up nearly that much for America's non-managerial employees.]

In 2008, the average CEO in Britain made 28 times more than the average worker, and the average CEO in Japan made only 17 times more.

America's public company executives are highly skilled at rationalizing the funneling of shareholder dollars to themselves, even when the companies aren't doing so well. One of my favorite examples is Merrill Lynch -- starting two years before the recent bailout.

In 2006, Merrill reported net earnings of $7.5 billion (which turned out to be inflated). That year, Merrill's Board members spent $5 to $6 billion on bonuses for about 2,000 executives and other employees -- money that could have instead been put toward paying down debts, promoting company growth, or
building reserves to cover future losses.

In 2007, Merrill posted losses of $8.6 billion -- losses that could have been largely offset if the folks running the company not been so generous (to themselves) with bonuses in 2006.

Despite huge losses in 2007, the folks running Merrill did not withhold bonuses that year. Instead, they cut the bonuses
(on average) by 40% -- though I suspect shareholders would have
preferred cuts of 100%. In short, the folks running Merrill doled out
between $2 and $4 billion in bonuses -- despite huge losses.

Thus, in just three years, Merrill's execs and employees pocketed $10 to $14 billion in bonuses alone. That's up to $4 billion more than Merrill got from us taxpayers in bailout funds via TARP.

It's all about opportunity cost: every dollar that went toward executive compensation could have instead been put toward saving jobs, promoting company health or enriching shareholders. Period!

Goldman Sachs is another example, though I have limited data: in 2007, Goldman paid just its top-5 execs $324 billion (most of which was in bonuses). I don't know how many shareholder-dollars the dozens (perhaps hundreds) of other execs and managers pocketed that year.

Here's what a corporate compensation consultant said to the New York Times about Obama's executive-pay-cap proposal:

"'That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,' said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm....

"Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms."

First, we know who butters Mr. Reda's bread (i.e., the folks needing an executive-compensation consultant), so it's hard to take his argument with even a grain of salt.

Second, if all public companies stopped over-paying execs and managers, then those people would NOT be able to simply go to other firms to get over-paid.

Third, restricting executive pay to half-a-million would not force any top exec to miss meals -- given how many millions of dollars they've already taken from shareholders over the years.

Below are just a few examples of CEO compensation in 2007, a year before the government bailout -- a year during which many execs were in the process of driving their companies into a ditch.

Those figures are for only one executive from each company and for only
one year's "earnings." I shouldn't have to explain why I put earnings
in quotes -- given that those companies apparently weren't truly performing
well by the end of 2007.

I do not have data on how much shareholder money the dozens (perhaps hundreds) of execs and managers working at each of those companies pocketed in 2007 -- or from 2000-2006, or that matter.

How is it that so many execs have been able to funnel so many shareholder dollars into their own pockets for so many years?

First, a company's Board of Directors (which generally are stacked with executives' lap dogs) has to approve executive compensation.

Second, there are no laws or regulations limiting how much the lap-dog-ish Board members decide to dole out.

Then there's the the Business Judgment Rule
-- a legal doctrine that basically protects corporate Board members and execs from
liability for making a bad business decision IF
they can show some sort of evidence that they'd made the decision with the the shareholders' best interests in mind.

How does one argue that the looting of a company (even during times of loss) is in the shareholders' best interests? Easily: "We needed to retain our 'talent' so that
said 'talent' could see us through the rough times; thus, we needed to grant high compensation packages."

Yes, such arguments are as weak as they are conveniently self-serving, but courts tend to buy them.

So, what can we do about this? Pressure our president and our representatives in Congress to pass some anti-looting laws and take other shareholder-protection measures.

One obstacle that stands in the way: many of our Washington politicians have received huge cash donations from public-companies' executives and lobbyists who are perfectly happy with the status quo. (See data at Center for Responsive Politics.)

Comments

Wow. I suppose most of us knew this to be true, but the stats really ram home the point. Public money covering debts that equal the amount stolen through bonuses.

The thing that gets me, that shows in what kind of a bubble these people live in, is the barefacedness of it all. That they still can claim they need to retain their talent! Talent?! And that $500,000 is "not a lot of money"... incredible.